Credit Conditions and the Real Economy: The Elephant in the Room

John Muellbauer and David Williams

No 8386, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Changes in credit market architecture are an important but unobservable structural influence on economic activity. For Australian data, we model non-price credit supply conditions within equilibrium correction models of consumption, house prices, mortgage credit and housing equity withdrawal. Our "latent interactive variable equation system" (LIVES) employs a single latent variable to capture evolutionary shifts (in credit conditions) that affect not only the intercept of each equation, but also interact with key economic variables. We show that credit conditions impact on consumption by: (i) lowering the mortgage downpayment constraint facing young households; (ii) introducing a housing collateral channel from house prices to real activity; and (iii) facilitating intertemporal consumption smoothing.

Keywords: Consumption; Credit conditions; House prices; Wealth (search for similar items in EconPapers)
JEL-codes: E02 E21 E44 G21 R31 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-ure
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Citations: View citations in EconPapers (17)

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Chapter: Credit conditions and the real economy: the elephant in the room (2012)
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